The Pattern in Twilio That Triggers Right After an Earnings Beat

Discussion in 'Options' started by CML_Ophir, Oct 31, 2018.

  1. CML_Ophir


    The Pattern in Twilio That Triggers Right After an Earnings Beat

    Date Published: 2018-10-29

    The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.

    Twilio (NYSE:TWLO) has been one of the best performing stocks since its IPO, and in its short history a pattern has emerged when the company does in fact report an earnings beat and the market reacts positively to the news. Twilio's next earnings report is due out 2018-11-06.

    This is a conditional entry -- the company reports earnings and if the stock move off of that report is a 2% gain or larger, then a bullish position is back-tested looking for continuing momentum in a short window to follow. The event is rare, but when it has occurred, the back-test results are noteworthy.

    If the conditional trigger is in fact not met, we can just put a pin in this strategy and wait for next quarter.

    For a full recap on what would move the market for Twilio on earnings, including a summary of what Wall Street expects, you can read Twilio Inc Earnings: What Will Move the Market.

    Twilio Inc (TWLO) Earnings
    In Twilio Inc, if the stock move immediately following an earnings result was large (2% or more to the upside), if we test waiting one-day after that earnings announcement and then bought a three-week at the money (40 delta) call, the results were quite strong.

    This back-test opens one-day after earnings were announced to try to find a stock that continues an upward trajectory after an earnings rally.

    Simply owning options after earnings, blindly, is likely not a good trade, but hand-picking the times and the stocks to do it in can be useful. We can test this approach without bias with a custom option back-test. Here is the timing set-up around earnings:


    * Condition: Wait for the one-day stock move off of earnings, and if it shows a 2% gain or more in the underlying, then, follow these rules:
    * Open the long out-of-the-money call one-trading day after earnings.
    * Close the long call 7 calendar days after earnings.
    * Use the options closest to 7 days from expiration.

    This is a straight down the middle direction trade -- this trade wins if the stock is continues on an upward trajectory after a large earnings move the two-weeks following earnings and it will stand to lose if the stock does not rise. This is not a silver bullet -- it's a trade that needs to be carefully examined.

    But, this is a conditional back-test, which is to say, it only Triggers if an event before it occurs.

    Since blindly owning calls can be a quick way to lose in the option market, we will apply a tight risk control to this analysis as well. We will add a 40% stop loss and a 40% limit gain.


    In English, at the close of every trading day, if the call is up 40% from the price at the start of the trade, it gets sold for a profit. If it is down 40%, it gets sold for a loss. This also has the benefit of taking profits if there is a stock rally early in the week period rather than waiting to close 7-days later.

    If we bought the out-of-the-money call in Twilio Inc (TWLO) over the last two-years but only held it after earnings and after an earnings pop higher, we get these results:

    Long 40 delta Call

    % Wins: 75%
    Wins: 3 Losses: 1
    % Return: 252%

    Tap Here to See the Back-test
    The mechanics of the TradeMachine® are that it uses end of day prices for every back-test entry and exit (every trigger).

    Looking at Averages
    The overall return was 252%; but the trade statistics tell us more with average trade results:

    ➡ The average return per trade was 52.8% over each 7-day period.
    ➡ The average return per winning trade was 86.5% over each 7-day period.
    ➡ The return for the losing trade was -48.1% over the 7-day period.

    This is how people profit from the option market. Take a reasonable idea or hypothesis, test it, and apply lessons learned.
    Tap Here, See for Yourself

    Risk Disclosure
    You should read the Characteristics and Risks of Standardized Options.

    Past performance is not an indication of future results.

    Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.

    Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.

    Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.
    eo1989 likes this.